CSX agrees to hire Hunter Harrison as CEO

CSX is set to appoint former CP and CN chief executive Mr Hunter Harrison as CEO on May 31 following weeks of speculation over the future of management at the United States Class 1 railway.

CSX agreed a deal with hedge fund Mantle Ridge on March 6 to appoint Harrison as chief executive and to nominate people for five seats on its board.

Harrison, who stepped down from Canadian Pacific (CP) in January after presiding over a radical revamp of the railway since becoming CEO in 2012, will get a four-year contract. Harrison, Mantle Ridge founder Mr Paul Hilal, and three others will stand for election to the CSX board. The hedge fund had earlier sought six seats. CSX’s current presiding director Mr Edward Kelly III will become chairman.

“I am proud to join the dedicated and talented railroaders at CSX,” Harrison says. “Together, we will implement Precision Scheduled Railroading - a model proven to improve safety, create better service for customers, produce a proud and winning culture for employees, and generate exceptional, lasting value for shareholders.”

Investors flocked to CSX shares when news of Harrison’s interest first broke, adding $US 10bn in equity to CSX in a matter of weeks. Mantle Ridge’s 4.9% stake in the company is now worth $US 2.3bn.

But some industry observers have questioned whether CSX, while far from a basket case, was really in need of an intensive makeover.

On February 21, CSX announced that current chairman and CEO Mr Michael Ward and president Mr Clarence Gooden will retire on May 31. The company at the same time confirmed that it was eliminating 1000 management positions. In addition, 800 CSX employees have accepted voluntary buyout/retirement packages.

CSX initially balked at the Mantle Ridge proposal, which called for a total compensation package for Harrison of more than $US 300m, including $US 84m to reimburse Mantle Ridge for buying out Harrison's severance with CP, and a stock option equal to 1% of CSX common stock, at the time valued at $US 159.5m.

However, it has now agreed to grant Harrison 9 million shares at their current value, 8 million of which will be granted as an inducement award over four years and based on time and performance. It will also put the proposed $US 84m compensation package to a shareholder vote.

CSX reported annual revenues of $US 11.8bn in 2016 and an operating income of nearly $US 3.6bn, approximately double that of CP. And despite reporting an operating ratio of 69.7% in 2016, its first sub-70 score, CSX is considered one of North America’s least efficient railways, with only NS with reporting a higher operating ratio (70.1%) in 2016. Harrison’s CP reported a 58.6% operating ratio in 2016, which has improved from 81.3% in the year preceding his appointment.

Based in Jacksonville, Florida, CSX possesses a 34,000km network stretching from Miami and Boston in the east, to Chicago, St Louis, Memphis and New Orleans in the west.

Comment: Jason Seidl, Railway Age contributing editor and Cowen and Company managing director

Now that Hunter Harrison has become CEO of CSX we expect additional layoffs in addition to the recently announced 1000 members of management. We also expect CSX to easily exceed the previous long-term operating ratio goal of 65% over the next few years.

While CSX was already in the process of laying off/cutting 1000 people from its management ranks, we fully expect that Harrison will push that number higher and also cut into the rank-and-file headcount by reducing/combining yards and shops. It is also expected that the company will now focus on faster-growing areas of its network, which could lead to some shedding of lines.

Harrison’s proverbial playbook of cutting ‘fat’ and running a scheduled railroad may not seem complicated, but his methods are time-tested and we fully expect him to easily exceed the company’s previous long-term OR target of 65% over the next few years. Our previous estimates are currently under review.